Federal Reserve Chairman Jerome Powell on Wednesday reinforced the message that the central bank is increasingly paying attention to a slowing labor market and not just taming inflation, a shift that suggests it is likely to start cutting interest rates soon.
“We are not just an inflation-targeting central bank. We also have a mandate to hire,” Powell told the House Financial Services Committee on the second day of his semiannual testimony before Congress. Powell made his comments days after the unemployment rate hit 4.1%, the highest level in more than three years and an indication that the United States may be on the brink of recession.
Tuesday when Powell to Speak Before Senate Banking CommitteeHe noted that the Federal Reserve had made “significant progress” toward its goal of defeating Worst Rise in Inflation In four decades, the report noted that cutting interest rates “too late or too little could unduly weaken economic activity and employment.”
Congress has given the Fed a dual mandate: to maintain price stability and promote maximum employment.
“We have had to focus on the inflation mandate for a long time,” Powell said Wednesday. As the economy emerged from a pandemic-induced recession, inflation hit a four-decade high in mid-2022. The Fed responded by raising its benchmark interest rate 11 times in 2022 and 2023. Inflation has since fallen from its peak of 9.1% to 3.3%.
Jobs continue to be added – at a slower pace.
The U.S. economy and labor market have continued to grow, despite widespread expectations that much higher borrowing costs resulting from higher interest rates by the Federal Reserve would trigger a recession. Yet growth has weakened this year. From April to June, U.S. employers added 1.2% of jobs. Average 177,000 jobs per monththe lowest employment rate in three months since January 2021.
Powell told the House committee on Wednesday that to avoid damaging the economy, the Fed is unlikely to wait until inflation reaches its 2% target before it starts cutting interest rates.
Markets welcomed the Fed’s more dovish shift, with the S&P 500 up 0.7% as of 1:30 p.m. ET, on track to hit a new all-time high this year. The Dow Jones Industrial Average rose about 0.5%, and the Nasdaq Composite added 0.9% to its record.
Most economists have said they expect the Fed to make its first rate cut in September. Powell declined this week to say when he envisions the first rate cut.
Powell, responding to questions from several Republican lawmakers, said the Fed and other financial regulators would revisit a proposal made in 2023, known as the “end of Basel III,” that would increase the amount of capital banks must hold to cope with potential losses.
Big banks have fiercely fought the tougher requirements, which came in the wake of the financial crisis of 2007 and 2008. They have warned that tougher rules would force them to cut back on lending to consumers and businesses, which could put the economy at risk.
Powell said the three main U.S. banking regulators — the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — were close to agreeing on a new version that would be subject to public comment.